How Do Dividends Work In The UK?

Ah, we do love a dividend! A dividend is basically a sum of money paid by a company (on a regular basis) to its shareholders.

They can only be paid when a company is earning a bit of cash and has made a profit.

Large companies tend to pay dividends to shareholders once or twice a year, but just because you aren’t a global company it doesn’t mean you can’t do the same.

If you own a limited company then you have shareholders too – in fact, you’re probably a shareholder yourself!   

Why you’re a shareholder

When you started out you had to appoint shareholders and assign shares – you might have several of shareholders, it might be just you and your partner, or perhaps you are the sole shareholder of your business.

The fact remains, as a shareholder you are entitled to be paid dividends from your business.

As the owner of a limited company, you might feel like there’s a lot to get to grips with, and you may well be asking yourself  “How do dividend payments work in the UK?”.

Well, allow us to shed a light on the basics. We will also explain why paying yourself a dividend is a tax-efficient way to draw money from your business.

What do I need to know about dividends?

First off, let’s explore the ins and outs of a dividend, what exactly is it?

  • A company can distribute its profit to shareholders via regular dividends.
  • Limited companies can issue them – even if there’s only one shareholder (you)! But sole traders cannot.
  • If your company is in profit you can announce a dividend at any time.  
  • They are paid after corporation tax has been calculated.
  • They can’t be classed as a business cost.
  • All shareholders in your business are paid dividends proportionate to their stake in the business.
  • The term “illegal dividend” is used to describe a one that has been announced when the company is not in profit.  
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How is a dividend issued?

Don’t worry, issuing a dividend payment isn’t overly complicated, and the more often you do it the less daunting it will seem. You will need to:

  • Make sure you have enough profit – check via your balance sheet and profit and loss, and do not announce a dividend unless you are sure your company is in profit.
  • Call a directors meeting, minute the meeting, and detail your intention to pay dividends.
  • Produce a tax voucher for each of your shareholders, this is a statement which shows the details of the shareholder and your company. It also depicts the net amount and tax credit.  
  • Distribute the payments and tax vouchers to your shareholders.
  • Make sure meeting minutes and associated accounts are appropriately filed.

Of course, this list alone can feel a little daunting. When we need to issue dividends to ourselves, we usually do so via our accounting software (we use FreeAgent).

With this, all we have to do is pay the dividend and wait for it to show up on our bank feed. We then ‘explain’ the transaction as a dividend and state which person the dividend was paid to.

FreeAgent then creates the dividend declaration for us and we can just print it and sign it.

This ensures we have the correct paperwork for the dividends and keeps all our accounts in order. It also includes it in any personal tax calculations we run.

What are the advantages of being a limited company owner and shareholder?

We’ve already touched on the fact that if you are at the helm of your own limited company then you are also a shareholder – which means you can pay yourself dividends.

In fact, as long as your company is in profit you can pay them every month if it suits you. But what’s so great about that we hear you ask?   

Well, taking a dividend is a tax-friendly way of obtaining money from your company. As a business owner, they mean you can take money out at a lower rate of tax, which is great news for your bank balance!

Personally, I take a dividend out of the company every month, alongside my salary – assuming there are enough retained profits to cover it.

This way, I can pay myself a lower salary and just enjoy the rewards of the business performance in a more tax-efficient manner.

Why is paying yourself a dividend a tax-efficient option?

Tax-efficient dividends

If you want to run a profitable business you need to minimise your tax liability.

How are you currently taking money from your business? Do you pay yourself a salary?

Do you pay yourself through dividends? Or do you pay yourself with a combination of the two? The way you pay yourself has a huge impact on keeping your tax bill nice and low. Let’s explore further:

Do I pay tax on dividends from my limited company?

You can use PAYE to acquire a regular income, but one of the best things about being a director is that you get to define exactly how you are paid.

Many directors opt to pay themselves a low salary and then take advantage of extricating a higher dividend payment when the company is making a healthy profit.

This is exactly what we do here at Business4Beginners.

To clarify, your company doesn’t need to worry about paying tax on the dividend payments it makes to shareholders. However, as a shareholder yourself, you might need to pay tax on any money you receive in this way.  

Whenever we personally receive a dividend, the amount is added to our self-assessment and we pay tax on it at the end of the tax year.

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How much dividend can I pay myself tax-free?

As a shareholder, you will need to pay tax if you receive over £1000 in dividends during the 2023/2024 tax year. It used to be £2000 but it was reduced by the Conservative government.

Essentially, it means the first £1000 of dividends is tax-free, anything above this is taxed.

However, keep in mind you will probably have a personal allowance of £12,570 (correct as of 2023/34)- the dividend tax rate applies once this personal allowance has been used.

How much tax do I pay on dividends in the UK?

Once you exceed your tax-free dividend allowance of £1000, you’ll pay dividend tax. The amount depends on which tax bracket you fall into.

You tax bracket is calculated by adding your dividend income to your other income (including salary).

If your total income is above your personal allowance but below £50,270 you’ll pay a dividend tax of 8.75% on all dividend income above the tax-free allowance.

If it’s between £50,271 and £125,140, you’ll pay 33.75% on dividend income above the tax-free allowance.

If it comes to more than £125,140, you’ll pay 39.35%.

Keep in mind these tax rates are just the rates you’ll pay on the proportion of the income that is from dividends. The rest will attract tax at the going income tax rates. All of these figures were correct for the 2023/34 tax year but do change regularly so always check the latest rates.

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Do you pay corporation tax on dividends?

Dividend payments allow a company to distribute profit to shareholders. To calculate profit the company must first deduct business expenses, such as employee wages, company insurance, fees for accountancy etc from its income.

The company pays corporation tax (starting at 19% for the smallest companies) from the calculated profit – corporation tax is paid before any dividends are paid out to shareholders.

The balance can then be paid as a dividend to shareholders, who can rest easy that corporation tax has already been paid (this is known as a tax credit).

If, like us, you’re using good accounting software, you’ll usually be able to see clearly how much profit is available to be paid out as dividends.

When we first started our company, we chose not to pay out any dividends. this meant we were able to build up our ‘retained’ profit since it carries over to future years.

This has meant that even in periods where we have struggled and perhaps not made a profit, we have still been able to pay dividends from the ‘retained profits’ of previous years.

This means you might want to consider if it’s better to leave some profit in your business to give you a pool of money to pay dividends from in the future, even if your business struggles.

Dividends and payroll

Do dividends go through payroll?

Dividends are separate from payroll – they are made to distribute profit to the shareholders of a business. Payroll distributes wages to employees of the company for the work they have done.

If you are the owner and sole shareholder of your limited company it might just be you working for your business. It’s important to remember to keep the two types of income – salary and dividend payments – separate (to avoid any confusion).

For us, this means we usually run our payroll first and make payments to the accounts we need to for our salaries. We then, run dividends and make further payments to ourselves to cover dividends.

We have found this is much cleaner and easier than combining payments into one sum as each payment can have it’s own individual explanation.

What is the most tax efficient way to pay myself?

As the owner and shareholder of a limited company, it’s possible to pay yourself exclusively by dividends if you prefer. However, it’s more common to pay yourself a low salary and then receive the balance of profit as a dividend.

Remember wages are classed as an allowable business expense – dividend payments are not.

If you choose to be paid entirely by dividend you won’t pay income tax on the money you withdraw, however, your company will have to pay corporation tax on the profits used to pay those dividends.

We suggest you pay yourself a low wage (a figure below your personal allowance). This will allow your company to receive corporation tax relief on your salary, and you won’t have to fork out for national insurance or income tax. Pay yourself the balance of any profit as a dividend.

This is something we have always been advised to do ourselves by our accountant. However, it’s worth keeping in mind that everyone’s situation is different. What is right for us, might not be right for you.

If in doubt, always speak to a good accountant for advice tailored to your situation.

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A Quick Case Study to Illustrate Our Point: Meet Jon

Jon owns a gift shop, in the tax year 2023/24 he pays himself a small salary of £8632 (this falls within the personal allowance threshold of £12,570), so Jon pays no tax on this.

Jon makes a profit and pays himself a further £3938 as a dividend payment. The total amounts to £12,570 – the personal allowance threshold, so Jon is still not required to pay any tax.

Jon then takes a further £1000 as a dividend payment, as he is allowed up to take up to £1000 prior to paying dividend tax, he still pays not one penny in tax.

But what if he wants to earn more?

If Jon were to take further dividend payments (up to a total income of £50,270) he would have to pay 8.75% tax on those further dividend payments.

So, let’s assume that Jon wants to take an income of £50,270 from his business in the tax year 2023/2024. If he were to take this only as salary (no dividends whatsoever), he’d end up paying around £7,540 after all the various taxes have been deducted (because after the personal allowance, the basic tax rate is 20%).

However, if he only took his personal allowance (£12,570) in PAYE salary and the remaining £37,700 in company dividends, he’d only end up paying around £3,299 in the various taxes (because the basic tax rate on dividends is only 8.75%).

That means by paying a lower wage and taking the rest in dividends he can save himself a whopping £4,241 in tax over the course of the year. It’s one of the perks of running your own business!

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Are you embracing tax-efficiency and operating a profitable company?

It’s certainly worth understanding the nature of dividends. They can bring great financial benefits to you as a shareholder in your limited company.

We have found this is one of the biggest benefits of running our own company, the fact we can decide how we pay ourselves in order to achieve the most tax-efficient outcome.

Of course, it’s important you still play by the rules and keep up to date with any changes in tax rates or laws.

But, we hope this brief guide has provided you with some useful information. When someone asks you “how do dividends work in the UK?” You’ll now feel more confident in providing an answer!

Even if you feel that you now have a good understanding, we still suggest you consult an accountant.

A good accountant can help you make the most of your business. They can also advise you on the best way to save money, and will have a superb working knowledge of all the latest tax efficiency methods.

It’s time to make the most of your business and ensure your company is operating in the most profitable way possible.

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Business4Beginners has been advising new businesses owners since 2013. The founder, Paul Bryant, has created, grown and sold several successful businesses and remains the editor and fact-checker of all content published on the site.
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